A Money Matters guest post
Do you know where your money will come from when you stop working? Do you know what kind of income you’ll be able to get? Do you understand what annuities are and how annuity rates affect you?
If you don’t have answers to these questions, you’re not alone. But the sooner you get clued up, the better your chance of having a secure financial future post-retirement. If you’re after comprehensive, unbiased information on pensions and retirement finance, head to the Money Advice Service and Pensions Advisory Service websites.
In this post, we’ll take a closer look at imminent changes to annuity rates and help you make sense of the implications these changes might have for you if you’re planning to retire in the near future.
An annuity is basically an agreement with an insurance company that pays you a regular income from the point you stop working for the rest of your life. When you retire, unless you’re lucky enough to have a ‘defined benefit’ pension, you’ll need to purchase an annuity or income drawdown plan to convert the funds you’ve built up through your pension into a regular income.
Until now, men and women have received different annuity rates. As women tend to live longer, they have received around 4% less annual income from their annuities than men. But thanks to a March 2011 ruling by the European Court of Justice (ECJ), that’s about to change. The decision, known as the EU Gender Directive, means that from 21st December onwards, life insurance and pension providers won’t be able to use gender as a factor when setting the pricing and benefits for their products.
Annuity rates for men have already been declining gradually over the last few years, but when the gender directive comes into force there will be a sudden and more substantial drop. That means that, as a man, you might be able to secure a higher income by purchasing an annuity before 21st December. However, it’s important to check whether you’d be sacrificing any benefits associated with your existing pensions scheme, such as a terminal bonus or guaranteed annuity rate.
Whilst the ECJ ruling means something like a 1% increase in annuity rates for women, there are a range of other factors that have combined to put women’s rates on a downward trajectory in recent weeks – this may cancel out any benefit from the gender directive.
If you qualify for an enhanced annuity (which pays a higher income to people with certain health problems or lifestyles), the impact of the gender directive won’t be as noticeable.
According to Which?, there is an expectation that, in the future, “more sophisticated assessment methods” will be developed for all consumers, using a broader range of factors to calculate annuity rates. This “may balance out the negative impact of the gender ruling.”
Photo Credit: Guilo Magnifico
Whilst it’s important to understand what’s happening to annuity rates, the key advice for pensioners remains the same: shop around. Research has shown that most pensioners can secure a better income by shopping around for an annuity, rather than simply sticking with their existing pension provider, but many people don’t even realise they have this option. Do some research, talk to an advisor, and choose carefully.